My 2 and a Quarter Cents on the Global Financial Crisis

Before I forget my entire thesis on the Global Financial Crisis, I have to pen it down. Note my disclaimer, I am no authority, and if you refer to this post, it is at your own peril.

Ronald Reagan came in in 1981 and in 2-3 years he successfully unleashed the free market forces and reduced the role of the Govt. Alongside, monetary transactions began happening over digital media, the widespread use of IT systems triggered the innovation of multiple financial products. Commercial banks were highly regulated in the US for historical reasons, and I-banks found work around, basically regulatory arbitrage, by a little something called Securitization. I-banks bought loans, pooled them, cut them and converted them to market tradable securities. Risk landed up in the hands of people who had no idea how to manage it. Meanwhile, the US went round the globe for purchasing consumables and outsourcing work and paid in USD. The USD is a strong currency not only because US is a majority share participant in global trade, but because all multinational transactions, like China buying Middle-East oil, happens using USD.

In the 90s, the US was the only superpower in a uni-polar world, and anyone in the globe with money wanted to invest US assets. After the tech bubble burst, investors didn't want to put their money in virtual businesses, they wanted real estate. It seemed real estate could never be too overpriced, and anyone with even a little creditworthiness will pay back. The lender will, anyway, sell these loans off, and would have recovered its loan. Then began the series of defaults, the bad debt writeoffs by I-banks, slowly dawned the expanse of the exposure, then the withdrawal of money from the markets and, ultimately, the crash. Liquidity for businesses is a short term concern, is this a recession? a depression?

Note to self: If I ever I do invest, it has to be in stuff that is simple and real and I have to be careful what I pay for it.